Other banks unlikely to go SBI way on base rate cut

The decision of the country's largest bank -- State Bank of India -- to cut base rates by 30 basis points on the first day of the New Year may not be replicated by other banks, say experts. Most banks, they say, have already linked lending rates to MCLR (marginal cost of fund based lending rates), and base rate is fast becoming irrelevant.

Meanwhile, the SBI base rate cut to 8.65 per cent from 8.95 per cent is likely to benefit 8 million customers. "Base rates are fast becoming irrelevant. Probably, SBI had a very small proportion of loans linked to base rate and by reducing the rates by 30 basis points (bps), it won't have much impact on their overall cost of fund," says Ashutosh Khajuria, CFO, president of treasury and executive director, The Federal Bank.

Khajuria adds with other factors like a higher inflation and hardening government bond yields, there is little scope for banks to cut lending rates from here. He points out that despite the 30 bps cut in its base rate to 8.65 per cent, it is still 70 bps higher than the bank's (one-year) MCLR rate (of 7.95 per cent).
Most banks are anyway offering home loans at 8.30-8.50 per cent.

A recent report by CARE ratings observes that the base rates of banks have come down from a range of 9.3-9.65 per cent to 8.85-9.45 per cent, while the MCLR is down from 8.65-9 per cent to 7.65-8.05 per cent. They, therefore, do not expect any rate action till March 2018. The RBI has cut repo rates by 200 basis points in the past three years, with 25 basis point cuts in the 12 months period ending December 2017.

Sunil Kumar Sinha, principal economist, India Ratings, says that with the government's recent decision to borrow Rs 50,000 crore more would further harden the government bond yields which had already inched up around 7.2 per cent from below 7 per cent. "With hardening government bond yields and higher inflation, there is now no chance of any rate cuts going forward," says Sinha.

The CPI inflation increased to 15 month highs in November, 2017 and reached 4.9 per cent. While food inflation was 4.4 per cent, other segments like clothing and footwear (5 per cent), housing (7.4 per cent) and fuel and power (7.9 per cent) witnessed elevated levels of inflation all through the year. The 10-years government yields have increased from 6.59 per cent to 7.29 per cent in 2017.  "It will remain range-bound around 7.2 per cent till March 2018," says the CARE report.

Meanwhile, with inflation going up and bond yields hardening, banks are now under pressure to increase their deposit rates. The deposit rate for 1-year deposits have already fallen to 6-6.75 per cent. "Due to high liquidity in the system post-demonetisation, banks could keep the deposit rates low. However, with that liquidity of over Rs 3 lakh crore being mostly used up and only Rs 60,000 crore left, banks could again feel the pressure to increase deposit rates," says Ashutosh Khajuria of Federal Bank.